G-7 focus on Russia, Japan

CBS.MarketWatch.com

WASHINGTON (AP) - The United States and its wealthy allies told Russian authorities on Saturday there was a "critical need" for that country to attack corruption and money laundering.

Financial leaders from the world's seven largest industrial countries saw encouraging signs that the global economy was beginning to stabilize after nearly two years of severe financial turmoil although there was discussion among the group about the threats posed from a potentially overheated U.S. economy.

In an 11-page joint statement, the finance ministers and central bank presidents of the Group of Seven countries noted that Japanese authorities had given assurances that they intended to supply necessary government stimulus until "domestic-demand-led-growth is solidly in place."

Treasury Secretary Lawrence Summers, briefing reporters after the talks concluded, stressed that language as key to understanding the G-7 position.

"Japan was a key focus of discussion," Summers said. The United States has been stressing the need for Japan not to relent in its efforts to lift its economy from its worst recession in 50 years.

The communique was issued at the end of more than five hours of discussions among financial leaders of the world's biggest economies - the United States, Japan, Germany, France, Britain, Italy and Canada.

Russian Finance Minister Mikhail Kasyanov met with the group at the end of their afternoon discussions in an historic mansion near the White House in an effort to answer questions that have been raised in the wake of the money laundering probes.

"We are committed to cooperate with any investigation," Kasyanov told reporters after emerging from the meeting. He said that Russia had already begun taking measures to control capital flight from the country, a term that covers both the legal transfer of money and illegal transfers.

The communique said prospects looked good for both the United States and Canada to continue with "another year of solid growth and job creation in a low-inflation environment."

But German Finance Minister Hans Eichel told reporters that the finance officials had discussed worries that the U.S. economy could overheat, with growth so strong that it ignites inflation pressures.

Eichel said that Federal Reserve Chairman Alan Greenspan, who also participated in the discussions, "made it clear that he is monitoring the situation." The Fed has already raised interest rates twice since June 30 and some economists believe a third rate hike may occur at the Fed's next meeting on Oct. 5.

Japanese Finance Minister Kiichi Miyazawa told reporters he had assured Summers and Greenspan that the Japanese government is committed to continuing efforts to boost government spending as needed to make sure that Japan's efforts to emerge from worst do not falter.

The G-7 communique did not include language Japan had wanted on keeping the yen from strengthening further against the dollar. Instead, the group merely pledged to "monitor developments in exchange markets and cooperate as appropriate."

But Italian Finance Minister Giuliano Amato said the G-7 officials had not ruled out the possibility of joint intervention in currency markets at some point in the future. He said such action would be taken "when and how it is deemed appropriate."

The G-7 discussions were being held in advance of the annual meetings of the 182-nation International Monetary Fund and the World Bank, sessions that are expected to be focused on ways to promote further reforms in the world financial system to prevent, or at least better manage, future Asian-style currency crises.

In that regard, the G-7 said they had set up a new Group of 20 nations, including both wealthy and poor countries, who will hold their first meeting in Berlin in December with Canadian Finance Minister Paul Martin as chairman.

The Group of 20, which was strongly pushed by the United States, is seen by the administration as a way to include relevant policy-makers in brainstorming sessions to come up with more far-reaching financial reform proposals.

The G-7 officials indicated that the upcoming IMF and World Bank meetings would produce a comprehensive strategy to greatly expand the amount of debt relief provided the world's poorest nations, something that officials have been trying to implement for more than two years.

Even with the unfolding Russian investigations, this year's IMF and World Bank meetings are taking place in an atmosphere markedly improved from a year ago. Then, a botched devaluation of the Russian ruble and the near collapse of a large American hedge fund threatened to push the United States and the rest of the world into recession.

That calamity was avoided in large part because the U.S. economy has continued to outperform expectations, serving as a market for crisis-striken Asian nations.

But with the trade deficit soaring to an annual rate of $247 billion, 50 percent higher than last year's record, U.S. officials are growing more concerned about the sustainability of that huge imbalance.

The dollar has fallen by 15 percent against the yen over the past 10 weeks. The decline has raised worries in the United States about higher inflation and a potential sharp correction in the stock market if foreign investors begin to cash out their sizable U.S. holdings over worries about the dollar's weakness.

The Dow Jones industrial
INDU, -0.20%
average fell by 524 points over the past week with stock prices now standing 1,047 points below the record high set on Aug. 25.

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